By Loan disbursements by the microfinance sector, which were slightly subdued in the first quarter of the current financial year due to players busy implementing the recent directives issued by the Reserve Bank of India, are expected to see some traction thanks to stable demand and improving asset quality. The industry had to set up the system and operations to be able to comply with the revised guidelines and it took some time.
In March, the central bank issued its final guidelines for MFIs, which would apply to all entities, including banks, small financial banks and NBFCs engaged in the sector. Under the revised guidelines, the RBI had set a common household limit of ₹3 lakh for loans to qualify as microfinance, unlike the earlier definition which distinguished between rural and urban households. This led to an upsurge in loan application rejections, which impacted disbursements.
According to Jiji Mammen, Managing Director and CEO of Sa-Dhan, the rejection rate increased by about 15% as household income above ₹3 lakh could not qualify as microfinance loans.
“More effort had to be put into researching applications as household income had to be taken into consideration. This led to a higher rejection rate, which increased to nearly 45-50% of total loan applications, compared to 30% previously,” Mammen said. activity area. This, in turn, affected disbursements.
The lack of an easily accessible household income database was also a challenge for players. So they had to create the database, which took some time, according to insiders.
The revised regulations would force the industry to increase its exposure and deepen existing markets and also explore new geographies.
The microfinance sector, which has a total gross loan portfolio (GLP) of ₹2,93,154 crore as of June 30, 2022, serves nearly six crore unique borrowers through loan accounts of 11.8 crore.
The GLP as of June 30, 2022 showed an increase of around 24% on an annual basis from ₹2,37,369 crore as of June 30, 2021, according to a recent report released by Microfinance Institutions. Network (MFIN). Microfinance loan disbursements in the first quarter of FY23 improved significantly to ₹45,830 crore from ₹25,503 crore in the same quarter of the previous fiscal year.
The number of disbursed loans also increased in the first quarter of FY23 to 116 lakh from 71 lakh last year.
“After the announcement of harmonized regulations for microfinance in March, most institutions were slow to make policy changes and adapt to the new guidelines, but the sector was still able to register a growth of 23 .5% of its portfolio year on year on an annual basis and 2.7% compared to the previous quarter, which is expected to further strengthen in the coming quarters with a favorable operating and regulatory environment,” said Alok Misra, CEO and director of MFIN, in the report.
Under the revised guidelines, Regulated Entities (REs) lending to the microfinance segment will need to ensure that loans are unsecured and not tied to a lien on the borrower’s deposit account; repayment obligations are capped; interest rates are not usurious; and without prepayment penalty.
The maximum possible indebtedness per borrower has also been increased to ₹2.4 lakh (from half earlier). It also removed margin caps, specifically applicable to NBFC-MFIs.
While the effective date of these guidelines was 1 April, the central bank had, in view of the implementation difficulties expressed by certain regulated entities (REs), advised them to fully implement these orientations at the earliest but no later than 1 October.
“Almost all NBFC MFIs raised their interest rates in the first quarter of FY23 under the revised regulatory framework. However, implementation of the new guidelines took time and disbursements slowed in the first quarter of exercise 23.
“Nevertheless, disbursements accelerated towards the end of the first quarter of FY23 and ICRA expects 22-25% growth in assets under management for NBFC MFIs in FY23 compared to than last year,” said Sachin Sachdeva, Vice President and Sector Head, Financial Sector. Assessments, CIFAR.
According to Kuldip Maity, MD and CEO, VFS Capital, there is good demand for credit and with the systems and compliances in place, the industry should be able to witness good growth in disbursements and outstanding loans. .
Average collection efficiency (including overdue collections) has also improved and moved closer to pre-Covid levels. As a result, delinquencies are improving and asset quality indicators are expected to improve further in FY23, Sachdeva said.